US News has noticed that those darn duopolists -- DSL and cable -- keep confounding the consumer advocates and blackboard economists by engaging in vigorous price competition. If this continues, they will have to think of another potential catyclsm with which to justify regulation.

The "consumer tragedy" rhetoric that has reared its ugly head in the aftermath of Brand X argues for revisiting what we mean by "consumer protection." Specifically, consumers aren't just looking for government assurances regarding rates and the like; they also want innovation and other attributes that make services more valuable -- which only markets, as opposed to regulators, can bring. I make this point in a letter to the editor that the Philadelphia Inquirer [sign-up required] saw fit to publish on Sunday.

We can all have opinions about where various markets are going and which technologies will be successful, but opinions that are backed up by real money have more credibility. That is why it was heartening, especially for those of us who have been watching the ups and downs of broadband over powerline (BPL) over the years, to see that Google, Goldman Sachs and Hearst - three presumably sophisticated investors - are investing $100 million in Current Communications, a small company that is a leader in BPL. Current is the company that is partnering with Cinergy to provide BPL in Cincinnati (the biggest BPL project now underway) and also partnered with Pepco in the pilot project in Potomac, Md. If successful, BPL will obviously be another broadband pipe and particularly beneficial for rural areas.

The release this week of Public Knowledge's "Principles for an Open Broadband Future" is important in at least two respects, even for those of us who disagree with some of the white paper's arguments and conclusions. First, the paper underscores that, in the wake of the FCC's Supreme Court victory in Brand X, Capitol Hill is the new battlefield for advocates of Internet openness. Second, it underscores (for the most part, anyway) how much the openness debate has evolved since the FCC began its effort to promote broadband investment and innovation by declining to saddle these services with onerous regulation.

FCC Chairman Kevin Martin tells a good news story on broadband deployment today in The Wall Street Journal. He also brings a needed corrective to the OECD statistics that show the U.S. 12th in the world in penetration, pointing out that U.S. broadband growth rates are high and that no country ahead of us on the list has a more dispersed or rural population.

Most importantly, the Chairman signals his intention to bring all broadband players into regulatory parity in the wake of the Supreme Court's Brand X decision. This means his agenda will be to regulate DSL subscribers down the the same level of relative regulatory freedom that cable subscribers have after Brand X. The Chairman understands that providers must be "free of undue regulation that can stifle infrastructure investment."

The FCC has a proceeding open that, even after its Supreme Court victory in Brand X, suggests there may be some uncertainty about whether the agency will regulate one-price "bundles" of broadband and other services like voice. To read my SkyReport op-ed on this issue, click here.

Those who would retain the regulatory status quo of pervasive price regulation have switched epithets in the last year from "monopoly" to "duopoly." A duopoly, we are told, is just as bad because the two firms in the market will cozily divide up markets and share supracompetitive profits.

It appears someone forget the duopolists that this is how the textbooks demand they behave. SBC has again escalated the price wars with cable, offering three free months of TV and high-speed Internet service for defectors from cable.

As I have stated repeatedly, the FCC needed to win the Brand X litigation to carry out its plan to minimize regulation and thereby bring consumers the benefits of investment and innovation in competing broadband networks. Based on his reaction to Monday's Supreme Court decision affirming the FCC, Chairman Martin appears to agree. But even as we (or at least some of us) celebrate Monday's decision as a victory for consumers, it is important to remember that, for the FCC, this is only a first step down a long and winding road.

As I have stated repeatedly, the FCC needed to win the Brand X litigation to carry out its plan to minimize regulation and thereby bring consumers the benefits of investment and innovation in competing broadband networks. Based on his reaction to Monday's Supreme Court decision affirming the FCC, Chairman Martin appears to agree. But even as we (or at least some of us) celebrate Monday's decision as a victory for consumers, it is important to remember that, for the FCC, this is only a first step down a long and winding road.

Tomorrow's DACA workshop represents a landmark for the project, and months of hard work by the working group, especially by Randy May and Jim Speta. The current draft report is not an end, but a beginning of the project and its five reports.

Mustering as much sincerity (and hopefully not too much institutional self-congratulation) as possible, I think it is a serious and important contribution to thinking about communications law reform.

In the rhetoric of communications policy debates, the irony of telcos being criticized for (potentially) bringing another video service option to consumers goes without saying. The promise of fiber-based video offerings has generated a backlash of pleas that such offerings be subjected -- before they are barely launched -- to various fees, network build-out requirements and other so-called "social" obligations. As stated elsewhere, these pleas arise from several potential motives, only some of which may be self-interested. An equally-important point, however, may be that these pleas illustrate inconsistencies -- which are ultimately unsustainable -- in the rhetoric and related policy judgments associated with previously distinct services that are converging over IP networks.

While it is not posted online yet, the clerk's office of Nebraska's unicameral legislature confirms that Governor Dave Heineman signed into law LB 645 this afternoon. The bill establishes an 18-member Broadband Services Task Force. The task force has 18 months to study the effects on competition of municipal broadband provision and is specifically charged to look at the supply and the demand of broadband in Nebraska before formulating recommendations to the legislature (see pages 6-7 of the bill for the full scope of its charter.) In the meantime, public power (a very big deal in Nebraska) is sidelined from the broadband game. Specifically, political subdivisions of the state and public power entities that were not authorized to offer "broadband services, Internet services, telecommunications services, or video services" by January 1, 2005 have lost the ability to get in the game. In effect, Nebraska citizens have a moratorium on new municipal broadband efforts and a promise that the issue will come back in force in early 2007.

I seem to recall reading a very good piece related to this issue. Oh yes, here it is.

The Wall Street Journal reports that SBC has lowered its DSL prices to $14.95 per month ($14.95!!!!). For those looking for robust competition in broadband markets, they need look no further. I await the the so-called consumer advocate crowd to begin brow-furrowing over predatory pricing. How dare SBC lower prices so...

The Wall Street Journal blames a coalition of cable and municipalities for defeating Texas's proposed statewide video franchising law, which would relieve the Bells' video offerings (and cables' too!) from city-by-city franchise negotiations -- otherwise known as shakedowns. Being subject to local franchising requirements will surely slow down the Bells' video rollout.

In this, consumers lose quicker entry and competition in the video and broadband markets. The Journal portrays the Texas loss as foreshadowing similar losses across the nation -- kind of like France's EU vote, but with much less world-historical consequence.

Were I a cynic, I would lament that we are forestalling video and broaband competition to instead increase in local government tax revenue. Perhaps with the additional revenue, the municipalities can build their own broadband systems since the private platforms are taxed so heavily. But I am not a cynic, so I will look to the last sentence of the Journal article quoting NCTA Head Kyle McSlarrow: "It may be appropriate that Congress affirm that these kinds of services be dealt with a very light economic regulatory touch,..." Now that would be the way to deliver all players from this local tax morass.

CNET has a story today on some of the challenges cropping up for municipalities trying to jump on the "free Wi Fi" bandwagon. Of course, a great deal has been written on this issue (see here, and here) but it was the following line that really shook me.

"But once a system has overcome interference problems, the biggest concern is how to handle network abusers, such as spammers, illegal file-swappers and people launching virus attacks."

Last week's draft legislative proposal by House staff has generated some optimism regarding movement in the transition to digital TV. In addition to hastening the day when consumers can enjoy higher-quality and potentially more plentiful television programming, the DTV transition promises to jump-start deployment of wireless broadband and other competitive services even after roping off more spectrum for emergency services.

Yet the transition may stall again if Congress continues to miss the forest for the trees on the issue of subsidizing digital-to-analog "converter boxes." This obstacle, which seems small relative to the overall digital transition, suggests we should temper our optimism about recent progress with healthy unease that success still eludes us.

First of all, my apologies for using the unattractive and ambiguous term "exurb" in the title above, but the term favored by social scientists appears in the headline of a Washington Post story on the difficulties of getting broadband in rural areas. It's important that rural and exurban America have access to competitve broadband, and it's a worthy issue for local officials to examine. There are right and wrong ways, to approach this however, as I'll discuss below.

Let me begin by admitting my own bias here. I grew up in what generally would be considered exurbs, developments outside of Phoenix. (We'd keep moving out into the desert, but our neighborhood would quickly be considered suburbs due to the Valley of the Sun's absurd growth.) I was born in Klamath Falls, Oregon, halfway to nowhere. I have aunts and cousins in Monroe, Oregon, other aunts and cousins in Midland, Texas, and even an aunt in the Canadian Rockies, miles from any sign of civilization.

As Ray noted last week, the D.C. Circuit rebuffed the FCC (again) for asserting authority it does not have. Yet despite the angst and juibilation surrounding the "broadcast flag" decision, the case did little to undermine the already-tenuous basis for the FCC to assert its so-called "ancillary" authority to regulate broadband "information services" under the Communications Act. The decision does, however, add more kindling to the fiery debate over which, if any, baseline obligations should be imposed on broadband to the extent competition justifies protecting these services from more intrusive regulation.

In response to my DTV Art of the Deal post, PFF Adjunct Fellow Joe Kraemer e-mailed the following thoughts, which I reprint here by permission:

1. In order for a [DTV deal] to emerge, there must be uncertainty on the part of all parties that a legislatively-mandated transition date in 2008 or 2009 will be enforced. In other words, the broadcasters must believe that there is a material probability that the date will be enforced while those organizations that want to use the vacated spectrum must believe that Congress may lack the will to enforce the date. Therefore, a legislatively mandated date creates the opportunity because it will paradoxically increase uncertainty [particularly with a presidential race in 2008].

2. The basis for paying the broadcasters an incentive would be the present value of accelerating the transition so that the alternative users would have access two or three years earlier than they otherwise would. The value of the incentive is not the absolute value of the spectrum.

3. The broadcasters would receive funds to cover transition costs, as well as an acceleration premium. There may be a need to set up some type of Transition Administrator that is outside the FCC and would authorize incentive payments based on actual progress towards vacating the spectrum.

The DC Circuit's vacation of the broadcast flag rule leaves the FCC's supposed Title I authority in tatters. The broadcast flag, a rule concocted as part of the compromise on the digital television transition, required broadcasters to "flag" digital content s as to make it harder to pirate.

Personally, I had no great enthusiasm for the flag, as I thought it inadvisable to found a new strain of intellectual property law in the FCC, an agency that has enough trouble with its current mandate. That said, the flag could be tolerated when seen in the context of the DTV transition as a whole, where its imposition was indispensible to the content industry signing-off. This "end justifies the means" thinking is not to be encouraged very often, but the value of completing the DTV transition is enormous, as I've spoken about here.

Title I always seemed a thin reed on which to premise a de facto copyright protection law, and now the DC Circuit has confirmed that it is not the empty vessel into which all sorts of broadband aspirational goals can be poured. Thus, this case has enormous implications for those who would want to regulate

One great use of a blog is to recycle things that you decided weren't good enough for a more formal paper. Blogs -- the refuse pile of discarded thoughts. Now, there's a great slogan.

In our Progress on Point on video services released earlier this week, Kyle and I discussed potential solutions to the "redlining" issue that cable raises against telephone company entry into the video market. But then we deleted it from the final version because it detracted from the pure principles we were trying to represent. Nonetheless, here is the notional idea for the edification of our blog readers:

[T]he Bells former and the cable companies current cries of "redlining" are based on the build out requirements requisite on their respective networks. Under the regulate down principle, the solution would be to compensate the incumbent for this implicit universal service obligation. We are not sure what the methodology would be or who the payors should be, and are certain that it should not be an ongoing payment obligation but should instead be one-time compensation for the sake of simplicity and administrability. To be sure, it would be a unseemly process fraught with ambiguity and difficulty. Under a rough justice principle, the answer may be to negotiate a one-time payment based on some rough notion (the skeptics could call it ransoming the market to continue the Stockholm Syndrome analogy) of what it owed, and for policymakers to be done with it.

This week's reincarnation of a "consumer bill of rights" in California dramatically illustrates the need to clarify the appropriate role for state communications regulators as part of overall telecom reform. But clarifying state and federal regulators' respective roles must go beyond considering who regulates; we also must consider why they regulate. Specifically, we must consider whether state regulation should attempt only to further basic social goals, or whether states should be allowed to engage in broader economic regulation.

It's not often that the cable industry can count on help from Lawrence Lessig regarding "network neutrality" -- the question of whether cable modem and other broadband service providers should permit Internet users to access the content, applications and devices of their choice. And yet, Lessig appears to have conceded an argument on which cable may rely to resist regulation if the FCC wins the Brand X case in the Supreme Court. That case ultimately will decide whether the agency can classify cable modem service as a largely unregulated "information service" under the Communications Act. Lessig's concession, however, may not be enough to keep the FCC from enforcing net neutrality even if the Court hands the agency a victory.

The VON Coalition has sent a letter to Arkansas legislators with the purpose of heading off state taxation of VoIP services. Ray wrote about it here; a follow-up is found here. While I've read the letter, I don't see it on their website and so a link will be forthcoming when available. Among other arguments, VON rightfully makes the point "VoIP transmissions are indistinguishable from other forms of data traffic - making voice traffic difficult to separate out from other e-mail and web surfing traffic for tax purposes." I particularly like VON's appeal to demand-side arguments regarding broadband. Nearly all policy proposals to increase broadband penetration focus exclusively on supply side effects. Not so with VON. This is good since understanding markets requires both sides of the equation.

As reported in National Journal's Tech Daily and TR Daily [subscriptions required], key staff and their bosses continue to predict that Congress will roll out telecom reform quickly over the coming months, rather than over the years predicted by conventional wisdom. Further, certain Congressional committees are reportedly trying to minimize the need to share control over telecom reform. Thus, one can add timing and turf battles to the list of reasons why policymakers and hangers-on should focus more on narrow approaches to telecom reform, at least in the near future.

Ray's post below spotlights an alarming trend: the application of traditional utility regulation to emerging, competitive services like VoIP. However, at least one state may swim against the current. The Colorado legislature is considering a bill to prohibit state and local taxation of VoIP and state regulation under the "telecommunications" statutes.

VoIP is by definition competitive therefore the old rules shouldn't apply. But state legislators there may also recognize the less obvious but salutary pressure created by tax competition. Will consumer enhancing VoIP providers spend more resources in Colorado or neighboring Nebraska? The policy climate matters. In addition, the Colorado law nods appropriately to FCC jurisdiction on E-911 standards. However, Section 8 of the proposed law suggests that it is necessary for the "immediate preservation of the public peace, health and safety." This clause is pro forma in Centennial State legislation. It preempts the referenda process that otherwise could "recall" and overturn a statute. Nonetheless, it is a stretch.

Word has it that one of the sticking points in the process has been an unclear assessment of how this bill would affect USF funding. Until USF is tackled comprehensively, many state proposals are trapped in limbo.

More on Brand X -- along with the insightful posts of Randy and Kyle below, I'd like to direct you to an op-ed Kyle has on CNet News.com. There he champions the position of his old FCC boss and suggests that some voluntary steps by cable to both define and implement "openness" on the Internet might forestall mandates by policymakers that could be far worse.

Today's Supreme Court argument in the Brand Xcase raises an important question: why did the Justices downplay the idea that courts should defer to the FCC when it comes to interpreting the Communications Act? By all accounts, the Court said almost nothing about this issue. The answer may say less about the Court or the parties' arguments than about the conflicting policy goals surrounding the FCC's efforts to promote investment in broadband networks.

After listening to the Brand X argument this morning at the Supreme Court, this is my quick reaction:

"For the sake of sound communications policy in the digital broadband era, I hope the FCC and the cable industry prevail. Surprisingly, however, except for Justice Stephen Breyer's persistent questions, there was little discussion at the argument concerning the deference due the agency's interpretation regarding what, in my opinion, are inherently ambiguous statutory provisions - the definitions of "information" and "telecommunications" services. A key issue briefed in the case is whether the 9th Circuit erred in holding that the FCC's interpretation was entitled to no deference under the Supreme Court's Chevron decision that holds that agency's reasonable interpretations of ambiguous statutory provisions should normally be upheld. In light of the ambiguity in the statute, this is a pretty good case for the Court to show some deference to the agency."

The FCC's consent decree with rural telephone company Madison River Communications has re-fueled speculation about the best way to avoid unnecessary regulation of Internet voice and other broadband-related services. In explaining their decision to settle complaints that Mad River had blocked Internet voice calls on its network, agency officials reiterated the wisdom of avoiding regulation of this service according to the same formula the agency has employed to minimize regulation of broadband generally. Specifically, the FCC has attempted to assign these services to legal classifications under the Communications Act that are subject to relatively fewer requirements. One example of this formula is the FCC's decision to classify Vonage's offering as an "interstate service" that is not subject to state jurisdiction. Another is the FCC's classification of cable modem service as an "information service" that would remain largely unregulated under Title I of the Act (a case that is currently being reviewed by the Supreme Court in Brand X).

Previously, I have said that the FCC's approach is better-suited to avoiding regulation than first classifying broadband-related services as regulated common carrier services and then "forbearing" from such regulation. But reactions to Mad River reveal that, although the FCC's approach to regulating Internet voice and broadband-related services is the best alternative under the current Act, the industry nonetheless may experience substantial delay and uncertainty even under the FCC's approach, especially to the extent the agency succumbs to what might be termed "political pressures."

Recent reports suggest that the broadcast industry will ask Congress to reverse the FCC's recent decision to limit required carriage of digital broadcasts to one (of potentially many) video streams that can be broadcast over a chunk of spectrum that once could support only one analog TV channel. These efforts to obtain digital multicast "must carry" can be criticized simply on equity grounds. In addition to the possibility of broadcasting all of their programming over the air, broadcasters are guaranteed carriage of at least one "primary" video stream on the local cable system -- special treatment of which most video programmers can only dream. Thus, it seems more than fair to require broadcasters, using the programming and distribution resources already at their disposal, to make the remaining video streams that digital tranmission will permit sufficiently attractive that cable operators and other video distributors will want to carry those streams.

But proposals like multicast must carry that force video platform owners to carry other programmers' channels also can be faulted for another reason: they don't improve programmers' long-term prospects for enjoying the most competing outlets for distributing their video content. These mandates do nothing to encourage investment in newer ways to distribute video, such as telephone companies' efforts to provide video over fiber.

The President encourages, nay even pines for, municipalities to offer broadband services. Why? Because municipal broadband networks improve public education, health care and local economies. Each of these areas is harmed by private broadband providers. Certainly taxpayer funded, publicly owned and operated broadband is superior to the delivery offered by private markets. In addition, public networks will attract new private investment and there should be no worry about subsidization since large wireline carriers receive federal subsidies.

Okay, the jig is up. These are the arguments made by the Florida Municipal Electric Association to Governor Jeb Bush in a fifteen-page letter. While their invocation of the President's agenda is shocking, what is most stunning is the number and degree of misleading and contradictory arguments are made in effort to gain Governor Bush's opposition to legislation that would restrain municipal broadband investments.

The battle continues to heat up between cable operators and telephone companies hoping to get into the video business. Today's Comm Daily [Lexis subscription required] reports on Verizon's legislative efforts in California to avoid a state law that would force VZ, where it is deploying fiber to support video service, to build out to the entire franchise area served by the incumbent cable provider. Not surprisingly, the local cable association has raised concerns with Verizon's bill. The statute from which VZ would be exempted if the proposed law passes has been described as an attempt to provide market competitors a regulatory "level playing field." But that unfortunate metaphor provides little guidance on how to piece through the many complex issues related to whether and how cable and telco video competitors should be regulated.

On CNet news yesterday, Frank Rizzo pointed out the potential pitfalls of Philadelphia's municipal Wi-Fi project. He points out some of the same problems inherent in most municipal telecom ventures: rising costs, low initial cost estimates, and most importantly, the fact that such ventures are unnecessary due to private competition. In the particular case of municipal Wi-Fi build out, another important aspect is the limitations of the technology and the emergence of better technologies, such as WiMax and 3G wireless.

Lest loyal readers suspect that PFF has been so distracted by our attendance at far-flung conferences that we have overlooked happenings here in DC, I would note several FCC actions last week. These may be some of the agency's last actions before Chairman Powell takes his scheduled bow sometime next month.

The agency fell short of its own expectations in its ongoing effort to reform the tortured scheme by which carriers currently compensate each other for exchanging voice and data traffic between networks. This portends further delay in eliminating some of the Rube Goldberg-like complexity that continues to plague both traditional phone competition and universal service issues, as well as more recent concerns such as the deployment of Internet voice and broadband. Almost to make up for this disappointment, the agency managed to adopt a slew of consumer-oriented items regarding such issues as the national do-not-call registry, slamming and fees for changing long distance providers and rules to facilitate mobile satellite service to consumers and public safety officials.

But the more interesting actions last week concerned (1) the Commission's recommendations on how to promote the availability of wireless broadband access; and (2) the Commission's decision to mandate only one channel of digital programming on cable systems (so-called digital "must carry"). Taken together, these two actions reflect an ongoing commitment to promoting consumer choice in the digital environment.

I echo Adam's praise of the Silicon-Flatirons (SF) conference on how to reform communications regulation amidst the "digital broadband migration," a concept FCC Chairman Michael Powell explored in a series of major speeches at previous SF conferences. (Of particular note in this regard was Powell's 2004 speech emphasizing the importance of achieving so-called "network neutrality" or "Net freedom" without preemptive regulation.) This weekend's conference underscored SF's reputation as an intellectual focal point for understanding and rationalizing the burgeoning field of "information law" -- an amalgam including communications law, intellectual property law, antitrust and competitive policy. To those wearied by the "he said-she said" of most telecom debates within the Beltway, this event in Boulder rightly has established itself as the thinking-person's policy conference. I would add to Adam's list of luminaries D.C. Circuit Judge Stephen Williams, Dale Hatfield, Mark Cooper and Qwest CEO Dick Notebaert.

Despite the wide range of strong opinions among participants, my take is that a rough consensus emerged on several key issues. This rough consensus provides much-needed guidance on how those who favor a "light touch" for regulation and those who would tolerate a heavier hand can come together to address the myriad issues arising from the emergence of digital technologies.

I am not an economist, and neither is Larry Lessig. Tom Lenard is, and in an article in Regulation Magazine, Lenard suggests Lessig has been "practicing economics without a license."

At issue is a piece Lessig wrote called "Coase's First Question" in the previous issue of Regulation, in which Lessig claims there are two types of Coase practitioners -- "proper-Coaseans," who ask first if the resource in question should be the subject of property at all, and "property-Coaseans," who go straight to asking where the property right should reside. This, Tom argues, is clever language but distorts Coase's message.

The FCC is considering whether to maintain, eliminate or delay further the deadline for cable companies to modify the set-top boxes they lease to customers so that they use the "CableCard" technology now visible in your local BestBuy. The cards, which you obtain from your cable provider, are security mechanisms that plug into a host of digital TVs, digital video recorders and other devices, thereby enabling those devices to read and display encrypted digital programming without obtaining a set-top box from the cable company.

There is a good argument that Congress did not mandate a "fully competitive" market for set-top boxes and other navigation devices as much as it simply instructed that consumers be given a choice to obtain those devices from folks other than the cable company. But even accepting the premise that the FCC should foster "device competition" in some ways, the current debate could benefit from a more rigorous evaluation of (1) incentives to innovate, and (2) the benefits consumers may reap if cable companies are allowed to continue their current involvement in the device market (i.e., leasing boxes to their customers that do not employ CableCards).

Before it decides what to do, the FCC should demand that the parties better explain the potential effect of the agency's decision on innovation and other consumer benefits, so that the agency's decision can fully reflect what competition means in this digital age.

There is much ongoing discussion of municipally-owned broadband projects, usually portrayed in this manner, as a battle between public-minded, well-intentioned politicians and greedy private firms who want to keep the forces of light from fulfilling the city's broadband dreams. Nevermind that good intentions are rarely sufficient basis for public expenditure. Despite utopian promises of economic development premised on building a a broadband network, this does not account for why private firms aren't doing it if this is the case. (See Laissez le Fiber Roulez)

"This is just like the government building sidewalks or roads," is one supporting analogy that is often used by municipal broadband proponents. The USA Today editorial approvingly quotes the City Parish Manager in Lafayette: "Installing fiber-optic cable, he credibly argues, is no different from laying down sidewalks or sewer lines." Unwittingly or not, the Manager is making what is called a "public goods" argument -- that a city or municipality needs to build this because it is a public goods.

Economist Tyler Cowen explains public goods here, and Nobel Laureate James Buchanan wrote an entire book on the subject, which is delightfully available online.

The arguments get more than a little involved, but the chief characteristics of a public good are non-rivalrous consumption and non-excludability. Thus a sidewalk is a good example of a public good -- one person can use it (for the most part) without interfering with others' use and you can't exclude others from its use. Because it's a public good, private markets will not supply it because there is an externality and a free-rider problem; that is, I will be able to use the sidewalk without paying for it. [But see, The Lighthouse in Economics, (discussed here) Ronald Coase's debunking of a classic public goods example that shows private markets come up with ingenious ways to solve public goods problems.] [Another interesting sidelight is that as consumption of roads becomes more rivalrous (in terms of congestion), that is becomes more acceptable to talk about private toll roads as a means to alleviate congestion. This also indicates, as Buchanan discusses, that nothing is a completely private or public good.]

What is striking about municipal broadband networks is that they have few, if any, characteristics of a public good. Broadband connections involve both rivalrous consumption and excludability (indeed, excludability is a rather important consumer demand in the guise of privacy concerns). Therefore, they are only public goods under the common parlance that some people might think they'd be good for the public. What these networks are, from an economic perspective, is a private good. And with private goods, we rely for the most part on private markets, absent market failure.

In other words, this is a meandering way of saying, the proponents will need to come up with a better analogy because the sidewalk and roads one doesn't work.

Finally, there is a curious confluence between the rhetoric of municipal broadband proponents (faster, cheaper, now!) and the defenders of the universal service status quo: these services are necessary, must be provided universally to all, and at a low rate. Watch then for the deal to be cut: In exchange for no more municipal broadband systems, roll universal service subsidies to broadband networks, impose service territory buildout requirements, underprice the service to achieve greater penetration, and, voila!, full blown public utility regulation for broadband. Maybe I am a pessimist...

David Isenberg posts regarding the battle over municipal broadband network in Lafayette, Louisiana -- something like the Battle for New Orleans without Andrew Jackson, but with more lobbyists. The post -- complete with a snide and gratuitous aside about this august institution -- asks a question:

Does the government have the right to say what sectors of a community should be served? He proceeds that if you answer the question in the affirmative, that the government can then dictate service areas (presumably through franchise agreements, as it does with cable, or public utility regulation, as it does with telephony), or build it itself. If the answer is no, he claims then that democracy is lost and that path leads to the vicious cycle of a digital divide. (This may be a slightly uncharitable recounting, but then again I am accused of being an ILEC zombie, so my false consciousness probably clouds my thinking.)

To Mr. Isenberg, then, municipalization is a valid expression of universal service policy. I suppose it is, but one with a rather spotty track record and thus warranting skepticism.

It seems to me that there are inevitable consequences from municipal broadband entry. First of all, private capital will flee. Competing with a municipal network -- particularly one with run out of a municipal electric utility with the ability to cross-subsidize and predate -- is a loser's proposition. Second, governments are prone to embrace the sunk costs fallacy; that is, they will not innovate or keep investing after the initial investment. Third, governments -- particularly when not facing competition -- tend to act like the most indolent monopolists ever when running a service. Fourth, there is an opportunity cost to communities. The bonds or taxes or electric ratepayers' money could be used elsewhere, for potentially much more pressing social needs -- like subsidizing a baseball stadium, say.

It seems to me that second path of Isenberg's dichotomy -- the government does not mandate who serves and where -- is much better at providing universal service than the path of "democratic" mandates. It may seems a paradox, but the lifeblood of networks and innovation is capital -- and capital goes where it is most welcome. Most of the economy works in this non-government mandatory way -- and finds a way of serving all segments of the population, albeit in different ways. In communications, cellular telephone adoption is perhaps the best example of the free market model working. Cell phones started as a high cost, low use accessory for the well-off, and now have penetrated throughout society.

The tension here is ultimately between capital, which follows its own path despite government's best efforts, and universal service. At its worse, the latter impulse becomes a prescriptive egalitarianism that drives capital away and leads to the worst sorts of monopolies -- government-owned ones.

I personally think municipalization of broadband is a Music Man folly. Communities fall for the pitch, and unless they can indefinitely cross-subsidize off an guaranteed rate base of an electric utility, will end up with a second-rate network that keeps eating cash. To be sure, this is a predictive judgment premised on some assumptions about the nature of government, but it is not without precedent. Ask Iowa how its communications network worked out.

Finally, if for social reasons, you do need to mandate a buildout, I suppose the franchise agreement model (taking out the shakedown aspects) is preferable, so long, like with cable now, economic regulation is precluded.

The gods of appellate court review are smiling on the FCC in the New Year, at least for the time being. The Eighth Circuit Court of Appeals affirmed a lower court injunction that prevented the Minnesota Public Utilities Commission from regulating Vonage as a traditional phone company. The Eighth Circuit decided, in essence, that it was bound to enforce the FCC's decision in November that Vonage's Internet voice service is an interstate service subject to federal jurisdiction, thereby preempting inconsistent state regulation. The FCC's November decision must still withstand review by an appellate court that will not be similarly bound. But the FCC's Eighth Circuit victory dodges another bullet in its efforts to promote investment and innovation in broadband and other advanced communications services by minimizing regulation of these services. One of the most significant of these efforts is the agency's Supreme Court appeal of the 9th Circuit's Brand X cable modem decision, as I discussed in the first and second weeks of December.

The Parents' Television Council. Even if they are anywhere close to reportedly backing 99.8% of the indecency complaints filed at the FCC this year, this is an impressive display of rentseeking behavior. A few weeks ago, I wondered what broadcast programming would consistently look like should the PTVC run the table, and then I saw an ad for a holiday music spectacular starring Clay Aiken and Barry Manilow. That seemed about right.

Now, on to 2005. In its Top Ten Trends for 2005, Red Herring anticipates "The Death of Distance." (David Isenberg properly blasts this header by stating that "distance is so dead its corpse stinks.") If Red Herring can pass off forward-looking statements like this to paid subscribers, I can pass off ridiculous forward-looking statements to web surfers. Bust out the crystal ball.

2. Air Supply to headline the Aspen Summit. Maybe not, but I was quite envious to learn that Heart will be participating at an upcoming VON conference, which continues to add verve to the conference template. So, perhaps we can have our own 80's revival. Ice cream break featuring Journey? Happy hour featuring Tears for Fears? I am very serious about this.

3. President Bush will not utter the word "broadband" in public. It was worth a few points for both presidential candidates to throw out some general ideas on broadband deployment, but the Administration hasn't shown that it is really serious about it. Had Kerry won, his name probably would have been inserted here instead. Just playing the odds.

4. Cell phone use on airplanes will be one of the most important communications issues...for public consumption. It has already begun. The FCC has posted instructions on its home page for the public to comment on the issue - which is unconventional. Leaving no stone unturned, Commissioner Copps seeks "to determine precisely what jurisdiction the FCC has over the annoying-seatmate issue." First off, the no brainer here would be the value added for users of data applications. And while I, too, worry about the annoying-seatmate, to the extent this adds yet one more option for a seatmate to be annoying, I would think that the issue can be worked out in the market.

Happy New Year to you, PFF blog readers, and to all of the folks at PFF.

The second of a seven-part series of a discussion between Chairman Powell, Larry Lessig and others last summer has been posted over at AlwaysOn. (Part one, loosely described, discussed why the government shouldn't build out a fat pipe for all Americans just because we are not currently in what equates to the BCS rankings for broadband deployment.) In this part, Powell discusses the rationale behind his four principles for 'Net Freedom. In answering Lessig's question on whether there is full FCC support to keep the Internet how it "really was," Powell states:

Well, it's an interesting question. As best as I can read it now, the Commission has pretty much bought into that subscription. The real test is going to come the day that somebody gets caught doing something nasty. That's going to be a real test of the policy.

In a recent article in Regulation magazine, Lessig writes that those "network owners who interfere with 'net neutrality' or compromise 'Internet Freedom' face a significant threat of subsequent regulation." I would agree that the threatof regulation is the middle course that the Chairman seems to be steering here through a policy statement. Lessig goes farther, however, in asserting that Powell has "clearly signaled to broadband providers that violating the four freedoms would lead the FCC to regulate broadband provision. Neutrality is thus the rule, at least so long as Powell gets to direct the rules."

The question boils down to what constitutes "nasty" behavior. One can imagine a host of activities that would render the orthodox wing of the end-to-end constituency apoplectic. Nevertheless, some actions that might facially violate "'Net' Freedom" - say a broadband provider limiting 'net accessibility for children or access preferences through some sort of affinity marketing program - might be beneficial to consumers and broadband penetration as a whole. The problem with 'Net Freedom, or net neutrality, or whatever you call it, is that it is an abstract policy in the name of an abstract goal. The proper answer to such calls is: "Maybe."

Drudge has linked to a survey conducted in London which indicates that 25% of respondents in a face-to-face survey, no less, subscribe to broadband so they can view porn. Broadband Reports follows up with a story from Japan that, due to broadband, sales of condoms are...hardy har har..."sagging."

The Supreme Court dealt another good hand to promoters of investment in competing broadband networks. Yesterday, the Court declined to review a decision in which the 9th Circuit U.S. Court of Appeals rejected cities' attempts to regulate cable modem service by treating cable modem service like cable companies' core video service. Regulation as a "cable service" would have subjected companies' broadband service to inconsistent, potentially onerous and possibly nonsensical obligations. For example, does the frequency range over which cable operators transmit cable modem signals over their networks constitute one or more "cable channels" for regulatory purposes and, if so, does that mean operators could be required, as with cable service, to feature "public access" or broadcast TV programming? Would operators have to scramble or block cable modem service to those using it primarily to view sexually explicit material, as is true for some cable channels?

But cities' most likely aims are to impose so-called "open access" or "net neutrality" mandates in favor of Internet service providers and content companies that have not bothered to build their own broadband networks. Oh, and, treating broadband like cable service would give cities more leverage under the Communications Act to squeeze higher fees from operators for the same use of public rights-of-way. Any of these scenarios would result in litigation or other costs that would either be passed on to consumers or would ultimately slow operators' investment in new services and capabilities. Although local governments have a few more legal arrows in their quiver, for now the battle to classify cable modem service under the Act will focus primarily on whether it should be treated as a heavily-regulated phone service or a largely unregulated "information service," as I discussed previously.

Dirigible? Last Thursday's Economist [subscription required] reports on plans to launch the first in a fleet of these lighter-than-aircrafts next month. A pathetic attempt to plug the short-lived "SkyCaptain and the World of Tomorrow" before its DVD release? No, this is an effort to float yet another method for ubiquitous deployment of wireless broadband service, courtesy of Atlanta-based Sanswire (get it -- without wires?) Networks. The company hopes to lift wi-fi-like equipment up, up and away in their beautiful balloons, which will hover in the stratosphere (like really low geostationary satellites) to provide web-surfers in large areas below broadband Internet access. It remains unclear whether the "strattelites" will, as some speculate, create additional "last mile" alternatives to cable modem and DSL providers or offer a cheaper way to get broadband to poor countries with few wires in the ground. But it does suggest that competitive pressures to invest in additional broadband networks persist. No word yet whether future launches will keep the birds aloft using hot air recycled from Washington, DC, rather than helium.

Yesterday, Governor Rendell of PA signed into law a bill that, among other things, requires cities to offer the incumbent telephone company the right of first refusal to provide the proposed service.If the ILEC waves its right to provide the service, the municipality may proceed with its proposed network.While the bill is a victory for telecoms, helping to prevent the intrusion of government into competitive private services, the extent of victory seems questionable.The right of first refusal allows for a private veto of a municipal project.The question remains, however, as to how much this helps the incumbent.If a municipality is contemplating entry into a market, it is usually because there are no viable private alternatives.This generally would indicate that private investment in infrastructure and services in that area would not make economic sense, or else an incumbent would already provide service there.To this end, it does not seem unreasonable that incumbents would not exercise their veto power, because they would not want to invest in a losing venture.

The Philadelphia Wi-Fi case is a perfect example of an incumbent allowing a muni to provide service rather than provide the service itself.Verizon chose to allow Philadelphia to go ahead with its municipal Wi-Fi plan, because, as can be assumed, Verizon did not see it as a profitable endeavor and thus had no interest in deploying a city-wide hotspot.

This leads to another question: what is the value added by creating a city-wide hotspot in a city such as Philadelphia?While not a very costly venture, it also does not seem terribly practical.There are currently over 50 hotspots in Philadelphia, at locations such as Starbucks, Cosi, and several hotels.With a city already so well-endowed with hotspots, the need for city-wide Wi-Fi makes little sense.Further, cities generally are very well wired for broadband access.Since the incumbents in cities already provide several viable means to access broadband either at home, work or public access points, there is little need for municipal intrusion into the broadband markets of cities.If the services were profitable, an incumbent would already be offering it.

Comm Daily (subscription required) reports today that state regulators do not anticipate federal preemption over broadband over powerline (BPL):

State regulators don't see a VoIP-like FCC preemption of broadband over power lines (BPL), said Mich. PSC Comr. Laura Chappelle, who heads the NARUC BPL task force. "I don't see the FCC or FERC [Federal Energy Regulatory Commission] as overly anxious to jump and try to preempt BPL," she told us.

Commissioner Chappelle is correct, though I feel sorry for any regulator who has to try and untangle the regulatory conundrums that BPL presents. With a regulated electric utility, the costs for the BPL infrastructure are in theory all collected through the electric rates that consumers pay. Thus, the incremental facility costs for BPL are zero, or so some would argue. Of course, one company's incremental cost of zero is another's predatory price, which is a consumer counsel's double recovery.

The cost allocation is quickly insoluble -- how much of BPL's cost is allocated to the regulated, electric side and how much to the competitive, broadband side? And how the regulator answers this question determines whether or not BPL is viable in the marketplace. Of course, if the regulator allocates all the costs to the electric side, the cost picture for BPL looks quite good. On the other hand, if costs are allocated to the broadband side, electric rates go down but the broadband cost may not be competitive. Complicating all of this: there is no principled way to do the cost allocation.

This is a little like the line-sharing context, where the incremental cost of the high frequency portion of the loop is zero. However, since the HFPL has economic value, there must be a positive price -- and hence an allocated cost -- to the HFPL. Trouble is, you can only theoretically describe that the cost should be allocated, you can't determine what it really is.

Like I said, cost allocation for BPL must be done, and the states would appear to be the ones to do it -- but I don't envy them.

Welcome back to Red Herring, which returns to newsstands this week. One notable tidbit from the issue - that troubling reminder of the early 90s, Vanilla Ice's "Ice Ice Baby" has resurfaced in the Billboard Top 25. For ring tones.

Ran across this belatedly, but RH online contains an interesting summary of their report on the cost estimate of running fiber to every home in the U.S. ($233 billion).

What CNET calls the "lowest tech high-tech business around," the DVD rental market, is now exploding with competition. Wal-Mart, Netflix and Blockbuster are engaging in a price war in anticipation of Amazon's entry into the rental market. Even McDonald's is test-marketing a 99 cent rental service (begging the question of whether Super Size Mewill be one of the options). All of this as broadband platform providers continue to ramp up their video-on-demand services.

Notwithstanding election-eve efforts to weave a gripping narrative about how trying to promote broadband by minimizing regulation effectively denies these services to many consumers, third quarter results from several broadband providers suggest that such a tale would be a gross oversimplification of this policy's impact, or would just be plain wrong. As the proffered story goes, the failure of business-biased policymakers to regulate large cable and DSL providers transforms them into evil monopolists or duopolists hell-bent on raising or keeping prices artificially high, which in turn dissuades hapless consumers from subscribing.

But providers' third quarter results, as reported late last week in the Wall Street Journal Online [subscription required], remind us that reality is often more complex than fiction. A major DSL supplier cut its price -- already on the low end of broadband prices nationally -- in the hopes of stealing more customers from rival cable modem providers. A cable modem provider attracted a record number of new subscribers without emphasizing price cuts, relying instead on its product's growing appeal to consumers. And both providers emphasized (along with another DSL provider) the importance of their overall suite of services (e.g., voice, Internet access, video, etc.) in attracting broadband customers.

One could lament that these and similar developments over the course of broadband's brief history do not resemble some idealized notion of telecom markets based on decades past; in that outdated vision, competition turns heavily on price because product offerings are more akin to stable commodities about which consumer preferences and demand patterns are clear and well-established. Yet broadband offerings continue to differ from one another, and broadband Internet use continues to evolve rapidly. At the same time, consumers are still trying to figure out what features they want and why, and how much they are willing to pay above the cost of dial-up Internet service.

This doesn't suggest the story of broadband can never approximate the morality tale that some see now. But until then, perhaps the moral of the tale is that we should resist making simple a set of market dynamics that are inherently not.

Today's San Francisco Chronicle contains the latest attempt to decipher a substantial difference between the Bush and Kerry platforms on tech and telecom issues. Cato's Adam Thierer points out that the current administration has given Chairman Powell little support over the past four years - yet the article includes the FCC's recent broadband over powerline and fiber-to-the-premises orders on its list of the President's 'accomplishments.'

The FCC's decision last week that unbundling obligations will not extend to Fiber-to-the-Curb loops (see Ray's posting on "Ownership, Investment and the FCC" below) accelerated deployment plans by BellSouth and SBC. Now, according to an article in Telephony Online,
it appears that a yet-to-be announced ruling on the interplay between sections 251 and 271 of the Telecom Act is behind Verizon's announcement that they will be deploying Fiber-to-the-premises in six former Bell Atlantic states.